In the Final Considerations of the Bank of Italy, Governor Visco gave ample space to the topic of banks and the financial system, which, like other sectors, has been enormously impacted by the pandemic. However, the governor recalled that the strengthening of the balance sheets of Italian banks continued in 2020 with the ratio between the best quality capital and the risk-weighted assets (CET1 ratio) which in the last five years has risen by more than 3 percentage points, to 15.5 per cent. The ratio of impaired loans to total loans, net of value adjustments, fell to 2.2 per cent, 7.6 points below the 2015 peak. For the major groups, classified as significant for the purposes of single supervision, the distance from the average of other countries in terms of capitalization and quality of loans has been substantially canceled », Visco specified.
According to the Bank of Italy’s findings, since the last quarter of 2020, new impaired loans are increasing, albeit slightly; they could continue to grow in the coming months, although less than in previous episodes of crisis. A sign in this direction comes from the increase, on average, of almost a third in the amount of value adjustments on performing loans, which reflects the worsening of credit risk; however, this increase is associated with significant differences between banks in the classification and valuation of loans. «Where not justifiable on the basis of a careful analysis of the creditworthiness of the individual positions, these differences will have to be closed in the coming months; all intermediaries must adopt policies based on prudence, ”said Visco.
However, the governor stressed that the extension of the moratoriums will increase the difference with other European countries regarding the intensity of use of this type of measures, which on the one hand can produce benefits for debtors, on the other make the budgets less transparent. banking. It is therefore necessary that banks use all the information available to them to correctly classify the loans subject to the moratorium, highlighting the losses in a timely and prudent manner, also to avoid potential doubts of investors on the actual quality of their loan portfolios.
Profitability and dividends
«Last year the return on capital and reserves fell by 3 percentage points, to 1.9 per cent, mainly affected by the growth in adjustments. Low interest rates, high costs and more intense competition fueled by the application of digital technologies to financial services offerings are squeezing profitability. The recommendation on the distribution of dividends, combined with the close dialogue between banks and the supervisory authority, meant that a large part of the profits in 2019 and 2020 contributed to the capital strengthening. Reorganizing the production and distribution processes to improve the offer and reduce costs was a priority before the outbreak of the pandemic, it is now a necessary condition », Visco said.
The governor also pointed out that several intermediaries, for the most part small and with traditional operations, have structural weaknesses; in some cases they are due to inadequate corporate governance and the weakness of internal controls, in others to the reduced ability to access capital markets, to innovate and to exploit economies of scale and diversification. Visco said “it is urgent that these banks review their business models. The stipulation of commercial agreements with other operators, the creation of consortia and, last but not least, aggregation operations are possible actions to be taken immediately to support profitability. Any crisis of individual intermediaries will be managed by trying to ensure an orderly exit from the market, despite the difficulties associated with the rigidity and incompleteness of the European regulatory framework regarding the failure of small and medium-sized banks ”.
Competition from new technologies
Much space was also dedicated to the advancement of new technologies and fintech in the world of banking and finance. The use of digital tools by customers has increased. “However, investments in information technology remain low. The infrastructure renewal process must be accelerated by adapting competences and organizational structures at the same time. The banks that in the recent past have invested most in credit risk assessment technologies have been the ones that have increased their lending to businesses since the outbreak of the pandemic.
The gaze is turned to the future and also to the opportunities that will arise from the recent acquisition of the Milan stock exchange. «At the end of April, the process of acquiring the Borsa Italiana group by Euronext, which controls various European securities markets, was completed. The inclusion, with a significant weight, of Italian companies in a group of European federated origin constitutes an opportunity for our financial center to strengthen the development of the services offered to issuers, intermediaries and savers, also contributing in this way to increase the European dimension of the capital market ”concluded Visco.